1. Field of the Invention
The present invention relates generally to methods and systems for creating a collection of securities for investment purposes. More specifically, the present invention relates to creation of a fund, including, but not limited to, specifically a registered open-end investment company (a xe2x80x9cmutual fundxe2x80x9d), or a portfolio of directly-owned securities owned by an investor or a group of investors (such as an investment club) or managed by an adviser, where the preferences of the fund""s or portfolio""s own shareholders, or the participating investors, are utilized in selecting the securities and the portfolios of investments to be owned by the fund or to be included in the portfolio.
2. Background Art
Currently, investors have a few basic choices in terms of investing their money. They can manage their money themselves, or they can have someone else manage it for them. If they manage it themselves, they can obtain information from a variety of sources, including financial planners and advisers, brokers, and printed, on-line, or other materials. These sources allow investors managing their own money to do so with more or less specific information and advice provided to them. By investing in this manner, an investor retains the discretion to accept or reject the advice, and the investor makes the final investment decision.
In contrast, an investor can have someone else manage the investor""s money for the investor, either by providing discretionary authority to a money manager or broker in an individual brokerage or other account managed for a specific investor, or by investing in a vehicle such as a mutual fund, a hedge fund, or some other collective investment vehicle.
An investor who is a member of an investment club can have her investments managed in part by collective action by the members of the club where the members vote for the stocks to be purchased by the club. Those member actions are undertaken usually in meetings of the club, or occasionally on-line through e-mail or otherwise. They involve the collective selection of an investment, as opposed to the selection of investments that reflect aggregated, individual actions, even though, once selected, the investments, in both cases are held in a collective investment vehicle for all the investors. Put another way, in a typical managed mutual fund, investments are selected by a single or few money managers who determine the investments for all investors in the fund; in an investment club investments are selected by the collective action (such as by voting or by designating a manager) of the relatively few members of the club, and investors must become members of the club by collective action.
The above-mentioned related patent applications describe inventions that allow smaller investors, through the alternative of a direct stock ownership system, to create portfolios that uniquely provide both the advantages of a mutual fund and of direct stock ownership. Using those inventions, a smaller investor can provide discretion to another, such as a financial planner or a money manager, to create and manage a portfolio of stocks for the smaller investor that is directly-owned by the investor. In that way, the smaller investor can obtain the benefits of xe2x80x9cactive managementxe2x80x9dxe2x80x94the benefits of having a professional manager make investment decisions to select the securities to be held in an investor""s portfolioxe2x80x94while also maintaining the benefits of direct stock ownership.
The benefits of active management are generally among the benefits that many investors seek in an actively managed mutual fund where a professional fund managerxe2x80x94the fund adviserxe2x80x94makes the active investment decisions for the fund as a whole. A smaller investor can also use the inventions described in the related applications to track a securities index, or an industry sector, using various selection criteria, thereby mimicking passively managed mutual funds like index funds. The above-mentioned related applications also describe a collaborative filtering technique that assists in the selection of securities to be included in the investor""s portfolio by allowing investors to choose to follow the selections of a selected group of investors. The above-mentioned related applications also describe a means to create a portfolio for smaller investors that is limited by or satisfies certain parameters, such as minimum diversification and maximum security issue concentration, so as to be useful as a substitute in 401(k) or similar plans.
A frequently noted problem with actively-managed funds or professionally managed accounts is the so-called xe2x80x9cherdxe2x80x9d phenomenon. Professional managers of a mutual fund usually have styles, or the fund frequently has a xe2x80x9cstylexe2x80x9d. For example, a fund could be a xe2x80x9cgrowthxe2x80x9d fund, seeking to invest in high growth stocks. Another fund may be an income fund, seeking to invest in high dividend stocks. When a stock is viewed as xe2x80x9cgrowth,xe2x80x9d the growth funds buy it, and similarly for other stocks and funds. Moreover, general trends in the economy are all followed by the same information sources, which report the same events and provide distribution means to the same commentators. Consequently, many professional managers hear and listen to the same things.
In addition, because many money managers are graded and reviewed based on how well they do relative to their peers, there is a tendency not to make investment choices that will be contrary to the decisions that one""s peers will be making. It is better to try to be just slightlyxe2x80x94but consistentlyxe2x80x94above average, than to run the risk of being a loser while trying to be a star. For these and other reasons, there is an observed phenomenon where the xe2x80x9csmartxe2x80x9d money follows the same investments, makes the same decisions, including the same mistakes, and usually performs less well, net of costs, on average than the market as a whole. The result is poorer performance from professionally-managed, actively-managed mutual funds than might otherwise be expected.
Under currently available offerings and the current art, an investor who does not wish to make his or her own investment decisions (or provide discretion to a broker or a money manager for an individualized account) can, very generally, either select to invest in a variety of passively-managed index funds or unit trusts, or select to invest in actively-managed mutual funds where the active management is supplied by a professional fund adviser. There is no way, however, for an investor to have a dynamic and changing actively-managed portfolio that reflects the aggregated, but individual, preferences of a plurality of investors, such as hundreds, thousands or millions of other people, and both as to the stocks in the portfolio and the proportion or weighting of the stocks in the portfolio.
Investing in an index fund is not the same. An index fund, like the SandP500 funds, invest in the xe2x80x9cmarketxe2x80x9d or some index and the fund increases or decreases in value depending on whether the xe2x80x9cmarketxe2x80x9d or the selected index rises or falls. At best, these funds reflect the investing public""s preferences only to the degree the public""s preferences are reflected in the upwards or downwards price of the specific stocks in the index and, therefore, in the fundxe2x80x94the investing public""s preferences as to what should be held in the fund are irrelevant. An index fund does not vary in its weightings (except as the relative capitalization of the stocks themselves may change) or holdings (except when the index itself changes), and the holdings and the method of determining the weightings are dictated by those who specify the index (such as Standard and Poors, a division of McGraw Hill, for the SandP 500 funds). Even a fund that holds all of the stocks that are publicly traded will not have the weightings in the fund dictated by the preferences of investors, but by whether the stocks in the fund with the specific weightings chosen for the fund are increasing or decreasing in value.
Thus, the prior art does not provide for a fund that reflects the aggregated, individual preferences of a plurality of investors, and that varies its holdings and weightings to reflect changes in those preferences. Investors do not have the opportunity to invest in a dynamically-changing fund that is actively managed by the constantly and dynamically changing preferences of a plurality of investors, rather than by a professional manager. Similarly, investors who want their own portfolio (or a portfolio managed by another or held in an investment club) to be managed to reflect the constantly and dynamically changing individual, aggregated preferences of a plurality of investors, do not have any means to do so.
What is needed is a way for individuals to invest so that they can avail themselves of the advantages (e.g., economies of scale, active management) of a mutual fund without being subjected to the attendant disadvantages. What is needed is a way for an investor to invest in a mutual find, or to have his or her own portfolio modified in a manner, that is actively managed by the constantly and dynamically changing individual preferences of a plurality of investors, rather than by a professional manager.
It is an object of the present invention to provide investment methods and systems that avoid the above-described problems.
It is a further object of the present invention to provide a vehicle for an unlimited number of investors to interact with an unlimited number of other investors and create a xe2x80x9cpeople""sxe2x80x9d mutual fund reflecting the interests and preferences of thousands or millions of different persons.
Yet another object of the present invention is to provide the first opportunity for investors to invest in a dynamically-changing fund that is actively managed not by a professional manager but by the constantly and dynamically changing preferences of thousands or millions of investors. The result may well be a fund that outperforms the professional managers, and the popular indices (i.e., the xe2x80x9cmarketxe2x80x9d).
A mutual fund according to the present invention, because it reflects the aggregate preferences of thousands or millions of individual investors, may or may not be diversified and may be heavily weighted in one sector or another. In any event, the fund will vary in its holdings and weightings as new preferences are reflected in the fund. Such a fund could, conceivably, have all or most of its investment in just one sector or a handful of stocks at one point in time, then be invested in hundreds or thousands of stocks at a different point in time, and then revert to just a few stocks held in the portfolio.
To carry forward the above objects, a method according to the present invention is used to dynamically manage a mutual fund , the mutual fund having assets and liabilities that are collectively owned by plural members. This method embodiment would include adjusting the assets and liabilities of the mutual fund in response to an action (buy, sell, trade, etc.) by one of the fund""s members. A determination is then made of that member""s pro rata ownership interest, based on the economic result of the action. A determination is also made of the other fund member""s pro rata ownership interests, based on the economic result of the action. This process is iterated, as necessary, in response to actions taken by any members of the mutual fund. In this way, the mutual fund is dynamically managed.
The present invention is alternatively embodied as a method that is useful in managing a portfolio of investments held directly by an investor. Securities are selected to be included in the portfolio according to the aggregate investment choices of a group of investors in a collaborative system where the selections reflect the aggregated, but individual, choices of the participating investors. The composition of what securities are included in the portfolio is modified, so as to reflect changes in the aggregate investment choices of the collaborative group of investors.
Another way to carry forward the above objects of the invention is to embody the present invention as a method of calculating numeric results for use in dynamically managing a mutual fund, the mutual fund having assets and liabilities that are collectively owned by plural members but that are selected in accordance with the aggregated, but individual, choices of the participating investors. One calculation performed in this method is to calculate an adjustment of the assets and liabilities of the mutual fund in response to an action of one of the fund""s members. The method also calculates the pro rata ownership interest of that member, based on the economic result of the action taken. A calculation is also made of the pro rata ownership interest of the remaining fund members, based on the economic result of the action. These calculations are repeated, as necessary, when fund members take additional actions with respect to the fund""s assets and liabilities. The numeric results of these calculations constitute products that are useful to enable dynamic management of the mutual fund.
Yet another way to carry forward the above objects of the invention is to embody the present invention as a computer system that implements any of the above-described methods.
Still another way to carry forward the above objects of the invention is to embody the present invention as a computer program product that bears instructions for effecting any of the above-described methods.
A further way to carry forward the above objects of the invention is to embody the present invention as a computer system that includes an input/output portion for manipulating the assets and liabilities of a mutual fund in response to an action by a member of the mutual fund. The system further includes an arithmetic logic unit for determining the pro rata ownership interest of the member taking action, as well as the pro rata ownership interest of the other members of the fund. The system also has a processor for controlling the input/output portion and the arithmetic logic unit to repeat the above functions as necessary, based on the actions by members of the fund. In this way the fund is dynamically managed.
Beyond overcoming the above-noted deficiencies of the prior art, the present invention also provides an added advantage of reduced management costs for its mutual fund. The investors in a mutual fund managed according to the present invention obtain the advantages of active management without the need to pay professional fund managers. The management is a computer system. Thus, the cost of running a fund according to the present invention is so reduced as to approach that of an index fund.
In the system of the present invention, investments are included based on the individual action and selection of each member acting on his or her own, with no collective action, where the aggregation of these individual actions reflects the overall investment in the portfolio. Moreover, the participants in the portfolio are self-selected or are participants that satisfy certain criteria, but they are not required to be admitted by collective actionxe2x80x94anyone can join or exit at anytime. In contrast to the present invention, investors in an investment club select investments for the club through collective action, such as voting, or by delegation to one or more individuals of investment decision-making. Although the present invention could also be utilized in the context of a voting mechanism, its preferred embodiment does not use collective voting action, but actual aggregated, individual investor action, to determine the investments to be held. The alternative embodiment of the present invention in the context of a voting mechanism differs from an investment club using the Internet or other means to create an electronic mechanism.
In addition, the investors in such a fund could be self-selected upon advertisement of the fund""s availability, or selected because of their membership in some affinity group such as a professional or other organization, or selected based on certain criteria, such as employment in a certain industry or company or having a certain net worth, or self-selected upon advertisement of a fund""s availability with certain stated objectives such as attracting investors interested in high technology stocks, or some specific investment approach. The invention works equally well for general availability funds as it does for selected availability funds.